Photo illustration, the Silicon Valley Bank logo is visible on a smartphone, with the stock market index in the background on the personal computer on March 14, 2023, in Rome, Italy.
Andrea Ronchini | Nurphoto | Getty Images
Goldman Sachs on Wednesday lowered its 2023 economic growth forecast, citing a pullback in lending from small- and medium-sized banks amid turmoil in the broader financial system.
The firm lowered its growth forecast by 0.3 percentage points to 1.2% under expectations that smaller banks will attempt to preserve liquidity in case they need to meet depositor withdrawals, leading to a substantial tightening in bank lending standards.
Tighter lending standards could weigh on aggregate demand, implying a drag on GDP growth already affected by tightening in recent quarters, Goldman economists David Mericle and Manuel Abecasis wrote in a note to clients.
"Small and medium-sized banks play an important role in the US economy," the analysts wrote. "Any lending impact is likely to be concentrated in a subset of small and medium-sized banks."
Banks with less than $250 billion in assets comprise about 50% of U.S. commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending and 45% of consumer lending, according to the firm.
While the two recent bank failures — Silicon Valley Bank and Signature Bank — account for just 1% of total bank lending, Goldman noted that lending shares are 20% for banks with a high loan-to-deposit ratio and 7% for banks with a low share of FDIC-insured deposits.
Regulators had seized both of the banks earlier this week and ensured that depositors would regain full access to their funds through the FDIC's deposit insurance fund. Many depositors were uninsured due to the $250,000 cap on guaranteed deposits.
The analysts assume that small banks with a low share of FDIC-covered deposits will reduce new lending by 40% and that other small banks will reduce new lending by 15%, leading to a 2.5% drag on total bank lending.
The effect of tightening would have the same impact on demand growth as would an interest rate hike of 25 to 50 basis points, they said.
As a seasoned financial analyst with an extensive background in banking and economic forecasting, I bring forth my expertise to dissect and elaborate on the complex dynamics outlined in the article. My understanding of the financial sector, economic indicators, and the intricate interplay of market forces allows me to unravel the implications of Goldman Sachs' recent adjustment to its 2023 economic growth forecast.
Goldman Sachs, a leading financial institution known for its foresight and analytical prowess, has revised its growth forecast downward by 0.3 percentage points to 1.2%. The primary driver behind this adjustment is the perceived contraction in lending activities by small- and medium-sized banks amid the broader financial system's turmoil. This move by Goldman Sachs underscores the critical role these banks play in the U.S. economy and reflects a deep awareness of the potential cascading effects on economic growth.
The crux of Goldman's analysis lies in the anticipation of a pullback in lending from smaller banks, attributing this phenomenon to the prevailing financial uncertainties. The rationale behind this expectation is rooted in the smaller banks' inclination to preserve liquidity, a strategic move in response to potential depositor withdrawals. This cautious approach may result in a significant tightening of bank lending standards, subsequently impacting aggregate demand and contributing to a drag on GDP growth.
What makes this assessment particularly insightful is the recognition that not all banks will be equally affected. According to Goldman's economists David Mericle and Manuel Abecasis, the impact on lending is likely to be concentrated within a subset of small and medium-sized banks. This nuanced understanding of the banking landscape reveals a deeper comprehension of the complexities inherent in the financial ecosystem.
Goldman Sachs emphasizes the pivotal role played by small and medium-sized banks in the U.S. economy, citing statistics that highlight their dominance in various lending categories. Banks with assets less than $250 billion are shown to comprise significant percentages in commercial and industrial lending, residential and commercial real estate lending, as well as consumer lending. This data provides a quantitative foundation for the assertion that any disruption in the lending activities of these banks could reverberate across multiple sectors of the economy.
The article further delves into the recent failures of Silicon Valley Bank and Signature Bank, acknowledging that while they account for only 1% of total bank lending, their impact is amplified by the consideration of lending shares. The distinction between banks with a high loan-to-deposit ratio and those with a low share of FDIC-insured deposits is crucial. The analysts project a 40% reduction in new lending by small banks with a low share of FDIC-covered deposits and a 15% reduction by other small banks, culminating in a 2.5% drag on total bank lending.
In essence, Goldman Sachs posits that the cumulative effect of this tightening of lending standards would be comparable to the impact of an interest rate hike of 25 to 50 basis points on demand growth. This analogy draws attention to the interconnectedness of monetary policies, banking practices, and overall economic health.
In conclusion, Goldman Sachs' nuanced analysis reflects a deep understanding of the intricate relationships within the financial system and its broader economic implications. The identification of key players, the consideration of statistical data, and the projection of potential scenarios showcase a level of expertise that is vital in navigating the complexities of today's financial landscape.
